SEC v. Jarkesy

Introduction

There have long been federal procedures for prosecuting securities-fraud allegations within an agency's administrative system. The agency could investigate the defendant, bring the enforcement action, and have the case decided by an administrative law judge on whether the defendant should be assessed with a civil penalty.

George Jarkesy challenged that system. Jarkesy, a hedge fund manager, was accused by the SEC of misrepresenting the value of assets and misleading investors. The agency took civil penalties and other remedy by an administrative proceeding rather than a federal court.¹ Jarkesy argued the Constitution entitled him to a jury trial.

The Supreme Court in June 2024 agreed. In SEC v. Jarkesy, the Court held that when the SEC sought civil penalties for securities fraud, the defendant was entitled to a jury trial under the Seventh Amendment.² The decision was not just about the SEC. It raised a bigger issue about the administrative government: How far can Congress allow its agencies to be both prosecutors and judges when the Constitution reserves some disputes for courts and juries?

The SEC's Administrative System

Federal agencies regularly enforce statutes through administrative proceedings. Instead of filing a case in an Article III federal court, an agency can sometimes bring it before an administrative law judge. These systems can provide specialized expertise and allow for agencies to deal with complex regulatory disputes efficiently.

The SEC heavily utilized this mechanism for securities enforcement. When the SEC accused Jarkesy and Patriot28, an investment adviser, of securities fraud, the agency was alleging that they mislead investors with the value of their assets and the manner in which investment decisions are made.¹

The SEC's administrative law judge ultimately found Jarkesy to be liable and imposed a $300,000 civil penalty.¹ Jarkesy appealed through the administrative system and eventually reached the Supreme Court.

A constitutional argument was that the Seventh Amendment gives that right to a jury trial in cases where there is a legal remedy.

The Seventh Amendment

The Seventh Amendment provides that "[i]n Suits at common law," the right to trial by jury shall be preserved.³ At first it may seem that this language is only about eighteenth-century lawsuits. But the Supreme Court has interpreted the amendment in a broader sense.

In Tull v. United States (1987), the Court held that a defendant facing civil penalties imposed by the government was entitled to a jury to determine its liability.⁴ The Court emphasized that a statutory claim could trigger the Seventh Amendment if it resembled an action traditionally heard in a court of law.

Why the Court Found a Jury Necessary

Writing for the majority, Chief Justice Roberts concentrated the civil penalty the SEC sought. The Court explained that penalties designed to punish or deter are legal remedies rather than purely equitable ones.² The SEC's penalties were partially based on considerations of culpability and deterrence, showing that their intention was not just to restore money to its rightful owner.²

The Court emphasized the similarities between the SEC's fraud allegations with common law fraud. At common law, fraud claims were typically resolved by courts of law and could involve juries.² Since the SEC was essentially pursuing a legal claim of a punitive remedy, the majority concluded that the Seventh Amendment applied.

The result is that Congress could not avoid the jury-trial guarantee just by placing a traditional legal claim in an administrative agency.

The Public-Rights Exception

The SEC had another argument. The Supreme Court has recognized a "public rights" exception in which Congress could assign some matters to administrative tribunals without a jury.²⁵ The government argued that securities enforcement fell under that exception because the SEC was enforcing a federal regulatory scheme created by Congress.

The majority rejected that argument. The Court explained that Congress could not simply label a dispute a public-rights matter and then take that dispute outside Article III courts.² Where a case involves a claim of a claim historically tried in a court of law and seeks a legal remedy, constitutional protections remain relevant even though the Congress has created a regulatory statute.

That principle places a limit on administrative power. An agency may enforce the law, but Congress cannot necessarily transform every legal dispute into an administrative proceeding simply by changing the forum.

The Dissent

Justice Sotomayor, joined by Justices Kagan and Jackson, dissented. It argued that Congress created the securities laws as, part of a comprehensive federal regulatory system and gave the SEC responsibility of enforcing them.⁶ From that perspective, the dispute was fundamentally about being regulatory rather than about an ordinary common-law lawsuit.

The dissent also warned that the majority's reasoning would disturb the ability of the federal agencies to enforce statutes through administrative proceedings.

The disagreement represents two different visions of the administrative state. The majority emphasized historical judicial power and constitutional limits. The dissent emphasized congressional authority to be able to design modern regulatory institutions. The issue between the two was who gets to decide when punishment is imposed.

The Separation of Powers Problem

The case also raises a bigger structural concern. Administrative agencies tend to have functions that the Constitution has traditionally separated. An agency can investigate, prosecute the case, and adjudicate the dispute within their own institutional structure.

That arrangement can make regulation more efficient. But it can also lead to a conflict of interest. In Jarkesy, the Supreme Court emphasized that the Constitution does not allow Congress to remove from Article III Courts matters that are fundamentally judicial in nature when the Seventh Amendment requires a jury.²

The ruling therefore puts another limit on the administrative state. Efficiency can't necessarily always override the Constitution.

What Changes After Jarkesy?

The decision did not end SEC administrative enforcement. Agencies can still go through administrative proceedings for matters that are within their constitutional authority. It simply limits the SEC's ability to pursue certain civil penalties for fraud through an administrative forum without a jury.²

Jarkesy does not declare that agencies are unconstitutional. It is a reminder that administration power has constitutional boundaries. When an agency is seeking a punitive remedy for conduct that is like a traditional legal claim, the Constitution may require the dispute to be moved to an Article III courtroom.

Why it Matters

SEC v. Jarkesy matters because it forces a modern regulatory government to confront and old constitutional principle.

The United States has now hundreds of federal agencies regulating highly specialized areas of economic and public life. Administrative proceedings can be faster and more technically sophisticated than ordinary litigation.

But the Constitution was about more than efficiency. The jury trial is a reflection of a judgment that when the government goes after certain forms of punishment, the ordinary citizens should be involved in the decision about liability.³ ⁴ Jarkesy protects that principle even though the defendant was accused of a more sophisticated financial wrongdoing and the enforcing agency has specialized expertise.

The question, then, is one that goes well beyond securities law. How much convenience can the government gain by trying to take disputes out of court before constitutional protections begin to disappear?

Conclusion

George Jarkesy was not asking the Supreme Court to decide whether securities fraud should be punished. He asked a bigger question: who decides whether he was liable and should pay the government's penalty?

The Supreme Court's answer was that the Constitution requires a jury in this case. SEC v. Jarkesy, therefore, represents more than a victory for one defendant or a limitation for one federal agency. It reinforces a bigger constitutional principle: when the government goes after a legal penalty similar to those traditionally imposed by the courts, it can't necessarily avoid the judiciary just by creating an administrative alternative.

The administrative state may be efficient. The Constitution demands something more. Before the government can punish, sometimes it must also put the case before a jury.